A Study Of The Momentum And Reversal Effect In The Forex Trading

Although forex is a leading investment products in the world, in our domestic forex is still banned now. At present, the advancement of China’s financial reform, especially the deepening of the exchange rate reform will create a good investment environment in which the RMB exchange rate can float freely and Investors can trade forex products freely. At the same time, on one hand, individual and f institutions forex investors have a huge demand, on the other hand, foreign forex agencies are eager to enter the domestic market. Both demand and supply factors will lead the forex to be lifting the ban and forex will be popular with the investors. In view of this situation, it is necessary to do some research in order to provide some effective investment advice for investors. At the same time, it is also very meaningful to make some forward thinking and research about the construction and supervision of domestic forex market.This paper makes some research on the momentum and reversal effect in the forex trading by adopting the method of combining theoretical analysis and empirical analysis. Firstly, it analyzes the momentum and reversal effect existing in the investment process in the view of behavioral finance theory and reveals the reasons of the existence of these two effects and these operation mechanisms. Secondly, it introduces the empirical analysis on the basis of theoretical analysis, which is based on the data of 12 kinds of foreign exchange rate from January 1,2005 to May 1,2013 by constructing winner—loser portfolio strategy to study the two effects in a further step. Thirdly, the analyzing result demonstrate that the momentum and reversal effect exists really in the forex trading, and the momentum effect is more extensive and stable than the reversal effect. Finally, it can get a conclusion from the theoretical and empirical analysis that forex investors can implement the momentum strategy to gain excess returns in the forex investment, at the same time, if forex business was opened in our country, our country should strengthen the supervision to create a good platform and a standardization of information transmission mechanism which will be convenient for investors to make some investment decision and useful for regulatorsto prevent the negative impact from momentum effect and the reversal effect to China’s economic impact to China’s economic.